Every item used to produce a good or service is classified as inventory or stock. That includes raw materials, goods used in the production process, and finished goods.
The goal of inventory management is to have goods in stock when you need them. Not having enough stock at any stage of the production process may jeopardise sales, but tying up too much cash in inventory can hurt your cash flow.
It’s important for all businesses to properly manage inventory. Here are some things to consider:
How much stock to keep
What’s right for you will depend on the nature and size of your business, as well as the type of inventory. If you deliver fresh food, for example, your inventory needs will be different (order smaller quantities but more often) than a custom t-shirt maker who sells over the Internet.
Generally, keeping little stock can boost your cash flow and lower storage costs, but you may be vulnerable to the efficiency of your suppliers and it may cost you more than if you bought in bulk.
Best practice: Analyse each step of the inventory chain (raw goods, goods in progress, finished goods) based on past turnover, sales patterns, and seasonality to determine an optimum amount to keep on hand. Take into account minimum stock levels and re-order lead times.
Best practice: Conduct regular inventory reviews to help you assess trends and manage the risks of holding too little or too much stock. If your business is more complex, consider investing in stock control software. Point-of-sale technology may also be used for inventory reviews.
Always check goods against the delivery receipt when they come in. Look for damage to the goods and packaging.
Best practice: Document, in the form of a checklist, inventory-receiving practices and ensure that all employees who receive goods follow the proper procedures.
Ensure that stock is stored properly, taking into account all possible factors that may damage it. That includes light, humidity, and improper hygiene. For perishables, consider using a “first in, first out” policy.
Best practice: Secure expensive and potentially hazardous products. If necessary, identify expensive inventory that is portable.
Best practice: Securely store all stock after it is delivered and dispose of any packaging.
Properly managing your accounts receivable can boost your cash flow and support your other business efforts. It pays to follow best practices for collections.